20080713 cuts food_crisis_bp08-di-5


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20080713 cuts food_crisis_bp08-di-5

  1. 1. 2/2008 The Saga of Rising Food PricesIntroduction These factors, through their impact on theThe twenty first century is likely to witness demand or supply side of food, have affectedan unprecedented escalation in food prices. prices and availability. This study examinesThis can be attributed to a sharp rise in the such factors and the gains and losses theydemand for food due to rapid economic generate for different national economies andgrowth in many developing countries individual actors within these economies,accompanied by a decline in supply fuelled including the impoverished. Next sectionby climate change due to global warming analyses the impact of change in the majorand the diversion of farm produce to the determinants of food demand and supply.manufacture of crude oil substituting Following that predictive models of pricebiofuels. This rise in prices will undoubtedly change are looked at to identify the gainerswreak havoc on the poor in developing and losers from the recent change in the foodcountries on either side of the threshold of demand and supply situation, with specificsubsistence. To ward off this impending emphasis on poverty and hunger. Finally,doom, developing countries need to invest in certain recommendations are made.rural infrastructure and marketinginstitutions and international organisationsneed to support research in the area of Food Situation: Demand and Supply Sideagricultural science and technology. FactorsDeveloped nations should also be willing to As in all markets, prices in agriculture areexploit their potential to augment global food determined by the relative strength ofsupplies. demand and supply side factors. Incomes are a very important factor as their increase leadsSince 2002, the simultaneous occurrence of to a rightward shift in the demand forseveral phenomena has affected food agricultural products (DD to D ′D ′ - See Fig.availability and prices. Many food-insecure 1) and a consequent increase in agriculturalcountries in Asia and sub-Saharan Africa prices. Such an increase in demand in thehave attained rapid and sustained growth international market can also come about ifaveraging more than 5 percent per annum import dependent agricultural countrieswithout matching agricultural growth. Diet suffer yield losses which cause domesticglobalisation has led to a shift in the supply to contract. On the other hand,composition of the food basket in favour of agricultural prices in the international markettemperate vegetables, grains like wheat and might also increase if supply falls i.e. thewheat-based products. At the same time, supply curve shifts leftwards from SS to S ′S ′ .economic growth has resulted in an This may happen due to two reasons: yieldsincreasing demand for energy. Due to a falling, or crops being diverted to non-foodshortage of fossil fuels, agricultural products use such as biofuels.have been diverted for use as fuel. At thesame time, climate change brought about by Assume initially that the demand curve andglobal warming is affecting yields in tropical supply curve are given by DD and SS, whichcountries, thus escalating the scarcity of food implies that the agricultural price is given bysupply. the intersection of the two curves at p. Due 1
  2. 2. to the factors explained below, demand Demand Side Factorsincreases to D ′D ′ and supply decreases to As mentioned, many food-insecure countries S ′S ′ ; the point of intersection of supply andhave experienced economic growth with thedemand curves now shifts to p ′ which is result that food demand and therefore foodhigher than p. Moreover, the quantity bought deficits have increased. The items for whichon the international market shrinks from Q to demand has increased vary from country toQ ′ which implies that developing countries country depending on tastes and existingcharacterised by shrinking domestic supplies levels of affluence. For example, duringbuy lower amounts even in the international 1990-2005, India witnessed an increase ofmarket – their aggregate consumption around 70 percent in the demand for oilshrinks. crops and moderate increases of 20-30 percent in the demand for Fig. 1: Interaction between Increasing Demand and cereals, meat, milk and Shrinking Supply vegetables. In China, cereal D′ S′ demand actually decreased D S by 20 percent in the same Agricultural Price period whereas demand for oil crops, meat, fruits and vegetables increased by more than 140 percent each. In Brazil, on the other p′ hand, cereal and meat consumption increased p significantly while consumption of fruits fell. S′ D′ As evident from the study D of food consumption S bundles over this period, Q′ Q Agricultural Quantity the positive thrust given to food consumption under various heads is strongerWe now look at the demand and supply side than the negative impact under other heads.factors which can bring about such anincrease in agricultural prices. Table 1: Direction of Food Consumption Change in Developing Countries, 1990-2005 Type India China Brazil Nigeria Kenya Cereals - X √ - - Oil Crops √ √ - - X Meat √ √ √ - - Milk √ √ √ √ - Fruits √ √ X - - Vegetables √ √ √ √ -Note:√ denotes increase of 20 percent or above; X denotes decrease of 20 percent or above; - denotesrest of the cases.Source: Based on data from FAO (2007)i2
  3. 3. Table 1 lists five developing countries majority of food items, which is presentlywhich together constitute around 40 percent the case, would drive up the value of landof the world population. Consider the case and cause an increase in the prices of allof the fast growers (countries with an annual food items.rate of growth of per capita incomeexceeding 3 percent): India and China. Only Supply Side Factorsone subcategory, that of cereals, showsnegative or insignificant (less than 20 Demand for Biofuels: Increasing demand forpercent) growth in consumption. If we crude oil coupled with an absence ofconsider the rectangles formed by the increase in its supply in the internationalintersection of crop types and countries as market has spurred an escalation in oilindividual data points, then in the case of prices. It is seen that when oil prices rangeIndia and China, only 2 out of 12 data points from US$60 to US$70 per barrel, biofuels(16 percent) imply insignificant positive become competitive with petroleum, evengrowth or worse. If we club the fast growers with existing technologies. With thewith Brazil and Nigeria (moderate growers international price of oil currently exceedingwith an annual growth of per capita income US$100 a barrel, biofuels are more thanof around 1 percent) even then 7 out of 24 competitive with oil. This might result indata points (less than 30 percent) imply the diversion of food grains and edible oilinsignificant positive growth or less. seeds to the production of biofuels rather than to food markets. The correspondingAddition of a poor performer like Kenya decrease in supply to these markets should(slightly negative per capita income growth drive prices of food grains, feedstock andduring this period) to this group yields a oilseeds up, which in turn would increasetotal of 13 such data points out of a grand the derived demand for land and push up thetotal of 30 – less than 50 percent of price of all land based products.“insignificant positive growth or worse”cases. For individual sub-categories, With fossil fuels becoming scarce, it isconsumption of milk and vegetables show a possible that governments have started tosignificant increase in 4 out of the 5 subsidise the production of biofuels, givencountries (except Kenya) whereas meat and that biofuels are associated with certainoil crops show an increase in 3 and 2 cases positive environmental externalities. Suchrespectively. subsidies also help to check the prices of fossilised energy fuels by providing anNote that all the mentioned food sub- alternative. For example, consider thecategories are derived from land either process of harvesting crops to producedirectly or indirectly. Direct land based biofuel for transport and other uses. Theproducts include fruits, vegetables, oil crops resultant emissions can subsequently beand cereals while those based indirectly on captured by the next crop of plants,land are meat and milk. In fact, the latter are constituting an input into biofuels, duringhigh-end products which are extremely land their growth cycle. In this way, it isintensive as fodder input to meat/milk possible to recycle carbon –- a mechanismconversion ratio is very high. With some which makes biofuels environmentallydeveloping countries experiencing rapid superior to fossil-based crude oil. However,growth, consumption of these items has any subsidy, which is justified on thesegone up drastically. grounds, also implies that diversion of crops for the production of biofuel becomes moreSumming up, it can be concluded that a attractive than supply to food markets. Thissimultaneous increase in the demand for a in turn leads to an increase in the price of 3
  4. 4. food and thus, the subsidy for the import dependency of developing countriesproduction of biofuel effectively becomes a is bound to rise. The increase in demand fortax on the poor who spend a large chunk of food from these countries in thetheir income on food. international agricultural market coupledWith technology changing, two distinct with a fall in supplies by developeddevelopments with opposite consequences countries will result in an increase in theare likely. The first enables better utilisation prices of agricultural items. A study byof waste biomass which implies that Easterling et al (2007)iii predicts that globaltradeoffs between food and fuel warming resulting in temperature increasesconsumption might be weakened and it of more than 3oCelcius may causewould be possible to have more of both in agricultural prices to rise by up to 40the future. However, second and third percent.generation technologies for biofuelproduction should be more efficient than The adverse impact of climate change onfirst generation technologies. Consequently, crop yields can be checked by carbonas the competitiveness of biofuel rises, there fertilisation (the beneficial effect of highwill be a tendency to divert more land, atmospheric concentrations of carbonwater and other resources to biofuel dioxide on crop yields). However, theproduction. Thus, food prices will rise salutary effect of this on crop yield is notfurther unless there is more food and entirely going to arrest its decline. Asagricultural science-related investment -- for mentioned earlier, with demand frominstance, in technologies that enable the developing countries rising, food prices willproduction of more food with less land and continue to rise in the foreseeable future.water. Such technological changes wouldarrest the widening of the gap in Models of Price Prediction: Distributioncompetitiveness between biofuel and food and Poverty Effectsand thus check the diversion of land to theproduction of inputs for biofuel generation. The various models of price prediction are summarised below. The IFPRIClimate Change: The risk of climate change (International Food Policy Researchis likely to have a negative impact on food Institute) Impact Model shows that theproduction. Rising temperatures will be forecasted price changes are extremelyassociated with increased risks of floods and sensitive to the underlying assumptions ofdroughts and, therefore, crop yield losses. A biofuel production. Consider a person whostudy by Fisher et al (2005)ii reported that in earns US$100 a month. If he spends $50 onmore than 40 developing countries, mainly maize, the purchasing power of this US$50in sub-Saharan Africa, predicted a 15 will be 36.5 percent [(1.72/1.26) -1)] higherpercent decline in cereal yields. Projections in the case of Scenario 1 as compared toalso show that land might become totally Scenario 2. Given that the person spendsunsuitable for wheat cultivation in Africa. half his income on maize, his totalOther estimates include large reductions in purchasing power corresponding to Scenarioyield of up to 22 percent in South Asia. 1 will be 18.25 percent higher than Scenario 2. Note that the results of both scenariosThus, global warming might lead to a 16 concur with the above-mentionedpercent decline in world agricultural GDP diagrammatic intuition – which predicts theby 2080. This decline will be associated impending decline in the availability ofwith a 20 percent decrease in the food.agricultural output of developing countriesand a 6 percent decrease for developed ones. Other projections differ on details andWith yields and production diminishing, the forecasted magnitudes. For example, FAPRI4
  5. 5. (Food and Agricultural Policy Research increase in farm gate prices will only be aInstitute), 2007iv predicts that corn and palm small fraction of the increase in retail prices.oil prices will rise, but not wheat. EIU’s In many cases, falling yields would imply(Economic Intelligence Unit) predictionsv lower production by net sellers and(EIU, 2007) are no less forbidding – an 11 therefore, lower surplus for sale. With onlypercent increase in the prices of food grains a negligible increase in prices at the farmover the next two years actually gives a gate, the income of the net sellers (usuallyhigher trend rate of growth (5.4 percent per medium or large farmers) might wellannum) of food grain prices than that decline. This is not true in the case of netcorresponding to the 72 percent increase sellers from developed countries who(4.6 percent per annum) by 2020 forecast by almost capture the entire benefit of anScenario II of IFPRI’s Impact model (See increase in retail price and therefore enjoyTable 2). an increase in total revenues. Such increase will also be facilitated by the fact thatAll price prediction models show significant decline in yields due to global warming willprice increase in one or the other type of be relatively negligible in developedagricultural product. It is obvious that an countries.increase in cereal prices will impact allcountries – net cereal exporters will benefit As far as net buyers are concerned, theand net cereal importers will find it more effect will be similar in developed andcostly to meet their demand. The incidence developing countries as higher prices wouldof loss will be more common than gains – lead to a loss in purchasing power.70 percent of the countries in the world are However, the percentage loss in purchasingcereal importers. Rising prices imply that power will be higher for net buyers fromthe shrinking food aid (2006 level was 40 developing countries as they spend a greaterpercent lower than the 2000 level) has to be proportion of their income on food.targeted to fewer countries, mainly in sub-Saharan Africa and to only impoverished Thus, a larger chunk of population in thegroups within these countries. developing countries, particularly the poor and net buyers of food, will have to bear theThe effect on individuals mirror the case of brunt of the price rise. This is true not onlycountries – net sellers should gain and net of the urban poor who have no land but alsobuyers should lose out. Here again, a the rural poor who are either landlessdistinction has to be made between sellers at labourers or farmers with plots of land sothe farm, wholesale or retail level. In many small that even means of subsistence cannotdeveloping countries, agricultural markets be generated. For example, two thirds ofare segmented because of poor rural households in Java own between 0 andinfrastructure and long intermediary chains 0.25 hectares of land, which would makeare the only links between the farmers and them net buyers.consumers. Given this state of affairs, the 5
  6. 6. Table 2: Price Prediction Models Study Special Assumptions, if any Results IFPRI Impact Model Scenario 1: Actual biofuel 26 percent price rise for maize, expansion plans for countries 18 percent for oilseeds by 2020; that have them and assumed net decrease in availability of plans for countries that do not food and calorie consumption Scenario 2: Double the 72 percent price rise for maize, Scenario Levels 44 percent for oilseed by 2020; net decrease in availability of food and calorie consumption FAPRI (Food and Agricultural No large impact on wheat prices Policy Research Institute) Model, due to falling per capita demand; 2007 palm oil (biofuel feedstock) prices to increase by 29 percent by 2009-10; corn prices to also increase till 2009-10 Economic Intelligence Unit, 2007 11 percent increase in the price of grains in the next 2 years; 5 percent increase in the price of oilseeds OECD-FAO Outlookvi, 2007 Price of coarse grains, wheat and (Organisation for Economic oilseeds to increase by 34, 20 and Cooperation and Development, and 13 percent respectively by 2016- United Nations Food and 17 Agriculture Organisation)Statistically, the number of hungry in the A 2007 study by F. N. Tubiello and G.world has been rising. FAO’s (United Fisherviii foresees a decline in the number ofNations Food and Agriculture Organisation) undernourished people in different parts ofestimatesvii (FAO, 2006) suggest that the world. It states that in developingbetween 1990 and 2004, the number of countries, the number of undernourishedundernourished rose by around 1 percent, will decrease from 885mn in 1990 toi.e. from 823mn to 830mn, though their around 579mn in 2050 – a decline ofshare in total population declined by three approximately 35 percent. However, this netpercentage points from 20 to 17 percent. change masks the prediction of an evenThe number of ultra poor (those living on bigger net decline in developing Asia fromless than half a dollar a day) has actually 659mn to 123mn during the same timeincreased in sub-Saharan Africa and Latin period (81 percent decline) and a rise in sub-America. Saharan Africa from 138mn to 359mn (160 percent increase). Middle East and NorthThe Global Hunger Index (a weighted Africa will witness a milder increase ofaverage of the incidence of under around 70 percent – from 33mn to 55mn.nourishment and low weight among There will be a gradual decline in Latinchildren and the under-five mortality rate) America from 54mn to 40mn.improved significantly in South andSoutheast Asia between 1990 and 2007 but Another point of concern is that in Asia thenot in the Middle East, North Africa and decline in the number of under-nourishedsub-Saharan Africa. Moreover, in recent will taper off – developing countries in thisyears, measures to alleviate hunger have continent will have around 73mn under-slowed down in countries like India and nourished people even in 2080. LatinChina but have accelerated in Brazil and America will see a slight acceleration inGhana. By lowering yields, climate change hunger alleviation between 2050 and 2080,might negatively affect food security and with the number of hungry touching 23mnreverse or slow down alleviation of hunger. by 2080. Another heartening feature is the6
  7. 7. reversal of the trend of increase in under- still lives perilously close to the threshold ofnourishment in the Middle East – the study subsistence and even below it. These poorpredicts a decline from 56mn to 48mn over households will be the hardest hit by thethe period 2050-80. food price increase. In sub-Saharan Africa the number of destitute and undernourishedBut despite these positive developments, people will increase.African hunger is likely to assume graveproportions – the number of hungry would Action needs to be taken immediately toincrease by a further 51mn during this prevent these adverse events. To step up theperiod to touch 410mn in 2080. world supply of food developed countries should dismantle programmes that preserve agricultural resources except in specificConclusion conservation areas. Developing countriesA simultaneous occurrence of several should step up investment in infrastructurephenomena will stimulate a rise in the price and marketing institutions so as to stall orof food at unprecedented rates in the course reverse the decline in yield that climateof this century. Food demand will rise change might bring about and to overcomebecause of rapid economic growth in many other supply-side constraints. Internationaldeveloping countries but at the same time, organisations should invest in agriculturalsupply will fall because of the impact of science and technology so as to increaseclimate change and the diversion of farm yields. Social safety nets need to beproduce for the production of biofuel which expanded with the help of resourceswill increasingly be used as a substitute for generated through economic growth in ordercrude oil. to provide succour to the undernourished and poor.In spite of the rapid growth in manydeveloping countries such as India,Pakistan, Bangladesh, China and some inAfrica, a large proportion of the populationi FAO (2007), FAOSTAT database, Available at www.faostat.fao.org/default.aspxii Fischer, G et al (2005), “Socio-economic and climate change impacts on agriculture: An integratedassessment, 1990–2080,” Philosophical Transactions of Royal Society B 360: 2067–83.iii Easterling, W.E., et al. (2007), “Food, fibre and forest products,” In Climate change 2007: Impacts,adaptation and vulnerability. Contribution of working group II to the fourth assessment report of theintergovernmental Panel on Climate Change, ed. M.L. Parry et al Cambridge, U.K.: Cambridge UniversityPress.iv FAPRI (2007), U.S. and world agricultural outlook. Ames, Iowa.v EIU (2007), “World commodity forecasts: Food feedstuffs and beverages”. Main report, 4thQuarter 2007.vi OECD and FAO (2007), OECD-FAO agricultural outlook 2007–2016, Paris.vii FAO (2006),The state of food insecurity in the world 2006, Rome.viii Tubiello, F. N. and G. Fischer. (2007), “Reducing climate change impacts on agriculture: Global and regionaleffects of mitigation. 2000–2080,”Technological Forecasting and Social Change 74: 1030–56.This Briefing Paper is based on a comprehensive study entitled,” The World Food Situation: New Driving Forces and RequiredActions,” authored by Joachim von Braun and published by the International Food Policy Research Institute (IFPRI),Washington DC in December 2007, Some of the arguments here, however, can be attributed to CUTS and are not covered inthe mentioned study. It has been compiled by Siddhartha Mitra and Ravi Kiran Naik of CUTS International.© CUTS International 2008. This Briefing Paper is published by CUTS Centre for International Trade, Economics &Environment (CUTS CITEE), D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India. Tel: +91.141.228 2821, Fax:+91.141.228 2485, E-mail: citee@cuts.org, Web Site: www.cuts-international.org; www.cuts-citee.org. CUTS Briefing Papersare to inform, educate and provoke debate on specific issues. Readers are encouraged to quote or reproduce material fromthis paper for their own use, but CUTS International requests due acknowledgement and a copy of the publication. 7
  8. 8. Note: This publication has been made available by CSEND with the agrement of the author. The Centre for Socio-Eco-Nomic Development (CSEND) aims atpromoting equitable, sustainable and integrated development through dialogue andinstitutional learning.http://www.csend.org/programmes-a-serviceshttp://www.csend.org/about-csendhttp://www.csend.org/project-sampleshttp://www.csend.org/csend-grouphttp://www.csend.org/knowledge-areahttp://www.csend.org/csend-portraitshttp://www.csend.org/community-of-artistsDiplomacy Dialogue is a branch of the Centre for Socio-Eco-Nomic Development(CSEND), a non-profit R&D organization based in Geneva, Switzerland since 1993.http://www.diplomacydialogue.org/missionhttp://www.diplomacydialogue.org/about-ushttp://www.diplomacydialogue.org/projectshttp://www.diplomacydialogue.org/publicationshttp://www.diplomacydialogue.org/conferenceshttp://www.diplomacydialogue.org/dialogue-forumhttp://www.diplomacydialogue.org/partnershttp://www.diplomacydialogue.org/linkshttp://www.diplomacydialogue.org/contacthttp://www.diplomacydialogue.org/sitemap